Retail Investor Advantages

There are some advantages to being a retail investor that might make it possible for you to beat the market without violating EMH.

Information Acquisition Cost

If you are an expert in some domain, it costs less for you to assess information in that domain than some trading firm. The trading firm has to spend money and suffer a time delay hiring an expert, incur the costs of communication overhead between people being difficult, also spend money on the opportunity cost of context switches and taking time away from traders at the company etc. Meanwhile, because you have both the trader and expert in your head, you save on a huge amount of overhead. Similarly, trading firms could pay people to camp outside Walmart and count customers, but if you already work at Walmart you can observe these things for relatively little marginal cost. Because of this, there are many small niches where the possible reward is too small to make it worth it for a trading company, but whose stakes are just the right size for retail investors.

Cheaper Liquidity

Nobody wants to be on the other side of the trade with RenTech, because RenTech makes smart trades. Everyone wants to be on the other side of the trade with retail investors, because most are uninformed and generally lose money over time. This is what makes it possible for Robinhood to offer commission free trades; uninformed flow is something that market makers really want to be on the other side of. The magnitude of trading fees often make or break a trading strategy.

Less Slippage

Moving less money moves the market less. As you scale up your Assets Under Management, your moves eat deeper into the order book and cause the market to move with you, eroding your profits. Large funds have entire teams of people dedicated to trade execution strategies to minimize their impact on the market. As a retail investor, you don’t have this problem to the same magnitude; buying $100k of SPX will move the market a negligible amount. The magnitude of slippage also often makes or breaks a trading strategy; many naive backtests ignore slippage (because historical order book information is typically more difficult to obtain than OHLCV), and end up unprofitable in the real world because of it.

(Nothing I post is financial advice, I am not a financial advisor, etc)